Fiscal Stability for Economic Growth

During a recent night out with friends, the topic turned to the economy, and the recent loss of the United States’ AAA credit rating according to Standard & Poors. (One of my friends here in Singapore works in insurance, and is attuned to the daily fluctuations in the markets.) Interestingly, there was quite a lot of agreement about what needed to be done… maybe because this was after a round of cocktails. Summarized in a series of phrases… “short-term hiring incentives” (like an expansion of the R&D tax credit and payroll tax cut) “medium-term fiscal consolidations – definitely cuts,” and then “long-term entitlement reform.” I asked… why is this so easy to agree upon with friends, and why are the politics still so screwed up? The answer that seemed to come about was that we, (sort-of) expats in Singapore, were part of the educated minority that could think this way.

As I think about it later, that seems awfully ugly to say, and I think maybe it is just the message getting lost from policy to politics. Think tank speak (phrases like “medium-term fiscal consolidation”) don’t help, and serve to distance many from what should be common-sense steps to get the economy going again and strengthen public finances. Given the grave consequences for getting this wrong – continuing economic stagnation in the United States (and most of the rest of the wealthy countries), atrophying of human capital, and unsustainable debt burdens – people who think about policy have to get better at messaging and selling the vision. Some of Thomas Friedman’s columns have been close, but they are still lost in grandiose visions of bi-partisan transcendence and national renewal. Dreamy, but…

Anyway, the common sense path forward for the federal budget has to have dead simple messaging, so that it can be reiterated when partisan excesses undoubtedly take over the negotiation process. It has to evoke a value that has been lost in the last three years, which businesses and consumers all agree will move capital from the sidelines into job-creating investments. All plans agreed upon must hew to this message:

Fiscal Stability for Economic Growth

What spooks markets right now is that no one is sure that governments know what to do to unleash the next wave of capitalism in the developed world, maintain a manageable level of inflation and increase living standards in the emerging markets, and do everything while staying current on debt loads. All of these uncertainties – while not knowing what the next shoe to drop will be – Spain, Italy, U.S. – make for difficult planning.

So, everything done by the federal government should be to make people feel more at ease that they know what the mix of taxation and spending might be in the future. Businesses might dislike taxes, but they hate not knowing what their taxes will be going forward. Stability should be the name of the game, because if we treat the federal budget with the professionalism it requires, long-term thinking is essential, just as it is for any enterprise. Okay, so now we have to translate the think-tankish phrases of the opening paragraph into stability-ese.

Translation Matrix

short-term hiring incentives becomes bringing stability to the job market: We have to understand that short-term hiring incentives, like an extension of the payroll tax credit, are necessary stimulus, but just like the R&D tax credit, it might end at the whim of congress. It seems like to stimulate innovation in the economy, taxing R&D activities would be counterintuitive, so making the credit permanent – like a lot of business leaders favor – would make sense, even if it does increase the deficit. The payroll tax credit, especially if redesigned to encourage more hiring of laid off workers, should become part of a portfolio of other “automatic stabilizers” – things like unemployment insurance that the government pays more for during economic downturn. It could be phased out according to predetermined unemployment rate thresholds, adding more certainty for when and when it won’t be around. Given “stimulus” will be politically unpalatable for a while into the future, the more things that become a background part of the landscape the better.

medium-term fiscal consolidation becomes stabilizing the federal tax burden and level of spending: This process is, of course, the hardest, since tricky accounting is extremely tempting to mask the true nature of tax and spending changes. However, tax reform and spending changes have to be spelled out in plain English so citizens know what they mean. For the revenue side, this means a lower corporate income tax rate will fewer loopholes, a cleaner individual income tax code with fewer deductions (the distortionary mortgage break comes to mind), a slightly higher gas tax, and some form of goods-and-services tax (similar to what the Canadians instituted in the 1990s). On the spending side, efficiencies must continue to be found, adjusting the federal pay scale might be in order (and I might want to work for the feds in the future…), and not core expenditures must be cut drastically. Although my personal preference would be for more infrastructure spending, simply maintaining the current amount with a more effective funds disbursement model (maybe an infrastructure bank) might be the best we can afford for now. Defense cuts should be aligned with strategic priorities in the 21st century, with some shifting of funds to more soft power type initiatives. Finally, once these decisions are made, we should ensure that tax rates and spending levels can be predictable for at least the next 10 years, although this is certainly easier said than done given the shifts in the makeup of congress and the general democratic polity.

long-term entitlement reform becomes ensuring stability for the future of social welfare and the American sovereign debt level: Over the long-term, stability is most desirable, as well as most appealing for the public’s sensibilities. People want to know what level of support they can expect from the government in old age (especially), so they can plan accordingly. Ensuring the stability of benefits expected while simultaneously stabilizing the federal debt/GDP ratio may prove to be extraordinarily difficult. While we certainly need critical self-examination over Social Security and Medicare’s long-term solvency, we have to acknowledge that while we are not a European social democracy, there is some form of support that must be given to all, especially given the country’s wealth. Especially given the unpredictable nature of the 21st century job market, social spending must provide a stable backstop – a trampoline for those to move forward in life. If the government succeeds in getting its fiscal house into stability, then it can in turn provide some stability for those impacted by a dynamic economy in a dynamic world.

I am merely an armchair policy analyst, and others have real plans. But from what I know about long-term sustainability, getting to an equilibrium in which parts of the system are stable, is certainly desirable. Because racing from one crisis to another in an blinkered attempt to patch the holes from downturn, is no way to handle a large enterprise’s finances for an increasingly uncertain future. There are things that society can control, and these measures can add up to some semblance of public fiscal stability. From there, when policies are intelligent, balanced, and responsible, people can look to the future with confidence and economic growth can be unleashed again.

(Because of course there are no shortage of things and services to provide to people.)

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